Obamacare - All posts tagged Obamacare

Is the Affordable Care Act a boon for hospitals? Investors have long argued fewer uninsured American means less strain on the industry’s already strained finances from unpaid medical bills.

Moody’s, however, warns that there are real drawbacks to the groundbreaking health-care law for not-for-profit hospitals. High-deductible plans sold by health-care exchanges could lead to bad debt. Also, hospitals face pressure from insurers looking to offset rising costs.

Moody’s writes:

An expected reduction in uninsured is the most positive aspect of the ACA for the hospitals, says Moody’s. The net benefit for hospitals has been eroded since the legislation was passed in 2010; first by the Supreme Court granting US states the option to not expand Medicaid insurance coverage in 2012, and now by the three emerging risks.

Questions about the financial impact of the Affordable Care Act swirled for months. Initially viewed as a boon for hospitals and insurers, the law has encountered delays and setbacks that left many wondering how many Americans will actually sign up for insurance.

Why do fixed-income investors acre? In the muni market, hospital bonds are a big and risky sector that comprises a sizable chunk of the high-yield muni market and high-yield tax-free funds.

Non-profit hospitals face a flurry of problems with the Affordable Care Act — popularly known as Obamacare – kicks into effect on Jan. 1.

Margins already squeezed by rising costs and Medicare cuts, will get tighter due to, among other things, additional infrastructure expenses, federal subsidy cuts, and payment uncertainties introduced by insurance exchanges.

But while Citigroup analysts Mikhail Foux, Vikram Rai and George Friedlander recommend approaching the industry with caution, they also see attractive investment opportunities. They write:

…since there is a certain stigma attached to the sector, in many cases we believe investors can pick up good quality credits trading at very attractive levels, since healthcare trades cheap to most other sectors… To summarize, we might see a substantial decline in tax-exempt healthcare issuance over the next several years, which should provide support for outstanding non-profit hospital bonds.

As of now, about 57 million Americans were without coverage at some point during the previous 12 months. The ACA attempts to remedy that, in part, by expanding Medicaid eligibility and creating insurance exchanges where individuals can buy health coverage. As of Jan. 1, all Americans must have health insurance or pay a penalty.

Foux and his team expect to see a gradual decline in non-profit healthcare issuance and a continued increase in taxable issuance. In response, Citibank recommends the following:

The “up in quality” trade – Investors should consider large, diversified, multi-state systems, especially those operating in states that accepted the Medicaid expansion under the Affordable Care Act.

Consider hospitals with experienced management teams in place who have been preparing for the ACA for some time.

For a more speculative investment – smaller hospital systems, especially those operating in states that accepted the Medicaid expansion, are potential takeover targets or could create alliances with larger non-profit or for-profit hospital systems.

Steer away from weaker stand-alone hospitals and hospital systems, especially those in states that did not accept the Medicaid expansion since the business operations of these hospitals could become even more challenged going forward.

Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.